070 2011 09 12 definitive guide raising money from angels kho tài liệu training

The Definitive Guide to
Raising Money from Angels

by: William H. (Bill) Payne
Entrepreneur
Angel Investor


Table of Contents

1. What to expect from this book
3
2. Thinking like an angel
5
3. Control - Who has it?
12
4. Fundable companies18
5. Planning growth and funding strategies
25
6. Exit strategies32
7. Why write business plans?
38
8. The business plan45
9. Form and style of your plans
53
10.Your angel investors59
11.Terms of the deal
66
12.Valuation
73
13.Using angels to build your business

80
14.Where to go from here?
88
Index

Copyright © 2006, Revised 2011 by William H. Payne
All rights reserved. No part of this book may be reproduced any form or by any electronic or mechanical
means, including information storage and retrieval systems, without the permission in writing from the author.

2


1

What to Expect From This Book
Starting a successful business is one of the most rewarding experiences in life. For
most of us, each phase in development is satisfying; from startup to successfully
raising money, to achieving positive cash flow, to success in rapidly growing the
company, and finally to harvesting the results of our efforts by selling the company.
Most experts agree that access to capital is one of the most difficult aspects of
starting and growing a business. The capital food chain is bewildering. Finding
investors is difficult, but convincing them to invest is much more demanding.
This book will explain the sources of capital available for starting and growing
businesses – from friends and family, angel investors and venture capitalists (VCs).
But the particular emphasis will be on finding angels and convincing them to invest
in your business. There is a substantial volume of information available on venture
capitalists, who invest in about 1000 new companies annually, but very little on the
elusive angels, who fund over 30,000 new companies every year.
Who are these angels and what motivates them to invest? – To successfully raise
angel capital, it is important to understand angels. Are they, like VCs, full time

professionals investing institutional money? Are they passive investors, or are they
likely to want to help you grow your company? Will they threaten your ownership
control of the company? I will describe angels and explain what inspires them to
invest in seed and startup companies.
How do entrepreneurs find and engage angel investors? – Until the late ‘90s, angel
investors were difficult to identify and engage. This book will provide you with
information on locating solo angels and show you where to find a directory of angel
organizations. And, once you find an angel, what then?
What are angels looking for in an investment? – Most angels don’t invest in
franchises or real estate deals. This book will describe in great detail the kind of
ventures in which angels tend to invest. It helps to understand how investing in
private companies fits into the investment strategy of angels, so this will be explained
in detail. Angels invest in “businesses that will scale.” Just what does that mean?
Angels are investors (not bankers or donors) who are looking for a definitive exit
strategy. This book will help you to thoroughly understand how angels will harvest
their investment.
How do you pick the right angels for your business? – There are angel investors who
will provide you with a “leg up” in starting your company. How do you identify angels
who bring more than just money to your business?
What forms of business plans do you need to prepare? – Did you know you need
multiple formats of your business plan to successfully attract capital? You will find
descriptions of these business plans, definitions of their content and explanations of
when to use (and not to use) each in this book.

3


How will angel investors assess the valuation of your business?
Valuation of early stage companies is a highly misunderstood topic. This book will
demystify valuing pre-revenue companies, define the range of valuation to expect

for your new venture and explain how angels determine where in that range is an
appropriate fair valuation for your new company.
Identify important terms and conditions of your angel investment
Term sheets include a confusing array of terms and conditions that are important
to entrepreneurs and investors alike. This book will define these important
terms, suggest appropriate terms for most angel deals and describe where to get
professional assistance for your deal.
How do you engage angels to help build your business?
Angels bring more than money to their portfolio companies. This book will describe
the mentoring and coaching roles angels prefer to assume and suggest how to
select angels from among your investors to serve in roles that can be critical to your
success.
The care and feeding of angel investors
All investors expect regular feedback on the progress of their ventures. What
most angel investors anticipate from entrepreneurs will be described as will how to
ascertain exactly what information your angel investors would like to see…and how
frequently they want this information.
How can angels assist you in executing your exit strategy?
While selling your company may seem far in the future, harvesting the fruits of your
labors is critical to achieving the goals of all shareholders. In this field, angels are
experts and will step up to help you do the best deal possible for you, your family and
your investors.
This book is NOT a template for writing a business plan, but will provide valuable
insights into what information investors seek in business plans, with a list of dos and
don’ts.
This book is NOT a worksheet for valuing your company, but will detail investor
expectations regarding valuations and provide insights into what is likely to increase the
pre-money valuation of your new company.
This book is NOT a set of legal documents to guide an angel investment round, but
does defines the important terms entrepreneurs and investors negotiate in closing

details and will show you where to get more information on specific terms and
standard closing documents.
The author is confident that this book will provide entrepreneurs with priceless
insights into starting and funding new companies!

4


2

Think Like an Angel
Who are these Angels?
Angel investors are usually entrepreneurs or retired businesspersons who have exited
their businesses. They tend to enjoy working with entrepreneurs and view angel
investing as “give-back,” as appreciation to those who mentored them in their early
days in business. Angels invest both their time (business acumen) and their money in
new ventures. They have a variety of motivations and are not simply investing in early
stage companies for return on investment. Most angels have many interests and
view angel investing as a part-time activity. Angels enjoy mentoring and coaching
entrepreneurs and especially assisting in the growth and success of their portfolio
companies.
Who are Venture Capitalists?
Venture capitalists (VCs) invest other people’s money in early-stage growth
companies. VCs are smart businesspersons who raise substantial amounts of
money from pension plans, university and foundation endowments, corporations
and wealthy individuals and invest those monies in growth ventures. Venture capital
funds are managed by these VCs as general partners, while the limited partners are
passive investors. Venture capital funds range in size from a few million to hundreds
of millions of dollars. A single venture fund is usually designed to have a life of
ten years with the possibility of extending the fund life for a few years thereafter.

Consequently, fund monies are invested in the first three years and investments are
harvested three to ten years later. VC firms raise several funds over time and may
have 2-4 active funds under management at any time, usually at different stages.
The general partners of venture capital firms have very little “skin in the game,” that
is, they usually invest only 1% of the capital under management with the rest coming
from the limited partners. The general partners charge the funds raised an annual
administrative fee of 2-3% to operate the fund (facilities, salaries, etc.) plus a 20%
“carried interest.” Carried interest is VCs’ share of the earnings of the fund, after the
capital is returned to the limited partners. With only 1% of monies invested, you can
see that VCs have a huge upside potential for successful funds, splitting the earnings
of the fund 20:80 with the limited partner investors, after the capital is returned to
those investors.
How do VCs and Angels Differ?
Angels invest their own money, while VCs invest the monies of their limited partners.
VCs are also full time investors with the opportunity to make substantial profits
from their investments. VCs tend to have a fully staffed office while angels tend to
work alone or with other angels and often have only modest administrative support.
Angels invest in seed and startup (pre-revenue ventures) and early stage companies
while VCs tend to invest in later stage, growth companies. VCs generally pick a few
business segments in which the general partners have substantial experience and

5


make all their investments in these verticals. Some angels follow this model, while
others invest in a much broader portfolio of companies.
What do Angels do with their Time?
Most angels have sufficient wealth to engage in those activities that interest them.
They normally do not have full time jobs or, if they are engaged in business, they
have delegated operating responsibilities to others in their organizations. Angels

choose to spend time with their families and pursue activities for which they have
considerable passion, such as travel, woodworking, golf, tennis, bridge and investing
in early stage companies. Angel investing is, at best, a part-time activity. Angels
enjoy watching their grandchildren grow and thrive as they watch their invested
companies become successful.
What Motivates Angels?
Return on investment motivates all investors, especially VCs who are investing other
people’s money. However, angels often have multiple motivations, both financial and
altruistic. All enjoy working with entrepreneurs. Some feel that angel investing is a
form of give-back to their community (economic development) or in appreciation
to those who mentored them earlier in their careers. I enjoy working with
entrepreneurs and feel that angel investing is a part-time activity that I can pursue
into my 80s; one way for me to stay engaged in the business community after years
of full-time involvement. All angels view return on investment (ROI) as important,
but in many ways, view ROI as a metric of success in angel investing. Since most of
us angels are only investing a small fraction of our net worth in our angel portfolio
of companies, a high ROI from these ventures is not critical to our futures. Angel
investing for me is one of many passions in my life. Regarding metrics, I hope to
keep my golf handicap low and my angel investing ROI highJ
What is Active versus Passive Investing?
Active investing is defined as being engaged in the operations of the investment.
Owning a franchise restaurant can be either active or passive. Active owners are
operating the restaurant on a day-to-day basis. Passive investors hire managers to
operate their businesses and review the financial reports of those managers on a
regular basis.
Investing in a portfolio of companies on the New York Stock Exchange is viewed by
most as a passive investing activity. Day trading, on the other hand, is very active
investing. Limited partners in VC funds are passive investors, while the general
partners are active investors.
There are many styles of investing in private companies. Many invest through funds,

limited partnerships or private placement memoranda and are not engaged in the
active management of these companies. Angel investors, on the other hand, are
actively involved in their portfolio companies as coaches, mentors and serving on the
Boards of portfolio companies.
Angel investing is considered active investing because of the level of engagement
described above. Since an angel investor’s portfolio many include as many as a
dozen companies, an angel will not, however, choose to be active in each of their

6


portfolio companies. Several angels usually invest in a startup company, and it is
probably not reasonable to want each angel to be involved in some way with each
company. It is usually clear that the angel or angels with the most experience in the
business segment (or vertical) and/or the most compatibility with the entrepreneur(s)
become actively involved with the company and represent all invested angels in the
progress of the company.
Time and Money: Angels Invest Both in Portfolio Companies
Many entrepreneurs have expressed to me that the value of the time that angels
invest in their companies exceeds the value of their money. Angels enjoy assisting
entrepreneurs in growing successful companies. Angels have the means and are at a
stage of life when they can do what they wish, yet some choose to spend substantial
portions of their lives assisting entrepreneurs. This is obviously an activity that they
enjoy and for which they bring great value. Most angel investors I know spend 10%
to 50% of their time engaged with portfolio companies, mentoring the entrepreneur
or key members of the management team and/or serving as active Directors. Those
angels who are actively engaged with an invested company usually interact at
least weekly with these entrepreneurs. The following are examples of the active
engagement common for angels with their portfolio companies:
•

•
•
•
•
•
•
•

Serving on the Board of Directors, perhaps as Chairman
Mentoring the CEO on operational activities
Interviewing candidates for key management positions
Assisting the management team in the design and operation of sales
channels
Working with the controller in developing useful financial metrics
Assisting in crisis management, working with the CEO and
management team
Serving as beta testers for new products
Assisting management in selecting and using tools, such as
accounting software.

Why do Angels Invest Only in Companies that will Scale?
“Investing in companies that will scale” means funding a venture that will grow very
rapidly in the first five to seven years, providing an opportunity for the investors to
exit with a high-multiple return on investment. For example, a pre-revenue company
valued at $1 million at the time of an investment that grows to a highly-profitable
company with $25 million in revenues that could be valued at $30 million in five years
is a highly scaleable investment. This example would result in a 30X ROI (100% per
year) for the investors for this company. If, on the other hand, the same company
were only able to achieve a valuation of $3 million in five years at exit, the ROI to
investors would be only 3X (or 25% per year) for this investment.

Angel investing is a risky opportunity. Of ten angel investments, the investor will lose
all invested capital in about one-half and receive a fraction of capital returned or a
small return on investment in most of the rest. Angels enjoy a highly successful exit
in only about one in ten investments. For purposes of the example to follow, let’s
assume, for simplicity, that one in ten angel investments must provide all the ROI for

7


the portfolio, while the other nine suffer complete lost of capital. (This is an extreme
example, but provides a simple example of why angels invest only in companies that
will scale.)
As a highly risky investment asset class, angel investors expect a 25% per year
return on investment (compared to perhaps 10% per year for investing in Fortune
500 companies in public markets). If an angel investor has $1 million invested in a
diversified portfolio of ten companies (assume $100,000 per company), his portfolio
should be worth $3 million in five years. $1 million compounded at 25% per year will
triple in five years ($1 million x 1.25 x 1.25 x 1.25 x 1.25 x 1.25 = $3.05 million, close
enough).
If an angel investor’s portfolio is to triple in value in five years, earning 25% per year
ROI, and nine of ten companies fail, that single successful investment must be a
“home run” to bring the value of the portfolio up to triple the value five years earlier.
Since, in this scenario, we invested $100,000 in each company and the portfolio must
be worth $3 million after five years and only one company must provide all the ROI,
that single successful exit must be worth $3 million, or a 30X ROI for that investment
(to achieve 25% for the portfolio).
Since we angels have no idea at the outset which of our investments will be produce
that “home run” (or we would not invest in the other nine), each and every one of
our investment must have the potential at the time we invest of achieving a huge
ROI, 30X in this example. For this reason, a sound angel portfolio should not contain

investments with the potential to only produce smaller returns on investment and
should be limited to companies that will scale.
This argument has been simplified for ease of explanation. It is unlikely that a
carefully vetted angel portfolio will result in only one success and 9 failures.
It is more likely that 3 to 5 companies will fail, a complete capital loss, while
another 3-5 companies will return some capital or actually produce a small
positive return on investment. It is reasonable then for angels to invest in
companies where a 15X-20X ROI in five years can be expected and still enjoy
a successful portfolio. However, a successful angel portfolio usually does not
include investment for which the best anticipated exit might be a 3X or 5X ROI.
Should one of these investments be the only highly positive exit in an angel’s
portfolio, the ROI for the portfolio over a span of years is likely to be negative.

Angel Asset Allocation: What Fraction of their Wealth is Invested in Angel Deals?
According to the Center for Venture Research at the University of New Hampshire,
angels invest as little as 3% or as much as 50% of their net worth in angel deals.
However, it is important to understand that most angel investors are not investing in
new companies as their livelihood. They generally became wealthy through other
business opportunities, often as entrepreneurs and are now investing a fraction of
their net worth in startup companies. Most angels I know have most of their wealth
invested in more conventional assets, such as real estate and the stock markets and
a small fraction, say 5 to 10% of their assets, in this risky class of angel investments.
These angels have the bulk of their investments in more conservative classes of
assets, preserving capital and providing income for retirement. They have made their
“nut” and it is being managed conservatively. Angels are investing their “mad money”

8


in an activity that they enjoy - helping entrepreneurs build businesses.

What is “Mad Money”?
Mad money is cash that angels will not need for retirement and which may be
spent imprudently, as in playing slot machines. We tend to view investing in startup
companies as a good use of our mad money, that is, we are investing in a company
that we believe we can help grow and be successful, but that we know is unlikely to
thrive because of the risk involved in starting all companies. While recognized as very
risky investments, we are motivated to invest in these companies because we have a
passion for being involved with entrepreneurs and their early stage companies.
What is a Portfolio Strategy for Angel Investors?
What do we know about angel investing?
•
It is highly risky – to reduce this risk, angels invest in several
companies
•
Angels tend to invest a small fraction of their net worth in angel deals
•
Startup companies often require multiple rounds of investment to
achieve success
Here are the assumptions for our simplistic angel portfolio strategy:
1. Our intrepid angel investor has a net worth of $10 million
2. This angel investor has decided to invest 10% this net worth in angel
deals
3. This angel has decided to make 10 angel investment to reduce risk
4. And, our angel has decided to hold 100% of each investment in
reserve for future rounds of investment in each company.
5. (Most angels would consider these to be reasonable assumptions.)
Based on these assumptions, what are the ramifications for an angel portfolio? Since
the angel is investing in 10 companies, let’s assign $100,000 per company. But our
angel is reserving 100% of invested capital for follow-on rounds, so each investment
would be $50,000, with another $50,000 held in reserve for future round.

In practice, our angel may invest $25,000 each in some companies that he expects
to make several follow-on investments and $50,000 in companies for which followon investing is unclear. But, an angel should always hold some capital in reserve
for each investment. For every company that requires no additional capital there is
one or more portfolio company that will require more than one additional round of
investment.
A thoughtful angel always plans a diversified portfolio (that is, investments in 8 to 10
companies) and makes smaller initial investments in a larger number of companies.
Furthermore, since angel investments are expected to exit in five to seven years,
angels often invest in 2-3 new companies per year in the initial investing years and
then 1-2 new companies and 1-2 follow-on investments in portfolio companies until
their portfolio of 8 to 10 companies is complete.

9


What are Typical Angel Investments?
Angels typically invest in companies for which they have some familiarity with the
industry segment (business vertical) where the companies operate. Angels are
normally the first funding the company receives after monies from the entrepreneur’s
personal accounts, friends and family are exhausted. This seed and startup funding
is usually invested by purchasing ownership in the company (equity) and is not a loan
(or debt). Investors expect the value of their investment to increase with that of the
entrepreneurs. Individual angels typically invest $25,000 to $100,000 per round of
investment, with 6-15 or more angels, making up a round of investment of $200,000
to $1 million.
Seed rounds of investment are usually made in entrepreneurs and their companies
at a stage when a product has been developed (or has been prototyped) and after a
customer or two have been identified who will buy the product. The management
team is usually incomplete and the companies are normally at the pre-revenue stage.
However, angels do not tend to invest in technologies for which an entrepreneur has

not been identified. Angels invest in companies, not technologies. (Angels do, of
course, invest in technology companies.)

Do angels invest in multiple rounds with a single company?
Ask any entrepreneur or investor: It is very difficult to plan the startup of companies,
consequently, entrepreneurs seldom if ever meet their financial expectations as
described in their proforma (planned, anticipated) financial statements. Because
revenues and earnings generally develop more slowly than planned, entrepreneurs
often run out of cash prior to achieving positive cash flow in their businesses, or prior
to expecting to need to raise more capital. Cash is the life stream of a company
and running out of cash will shut down a company immediately. Consequently,
experienced angel investors anticipate cash shortages by entrepreneurs and their
companies and are ready, if appropriate, to put additional cash into their portfolio
companies.
Many companies anticipate multiple rounds of investment by a series of investors
during the life of the company. In these cases, it is also appropriate for angels to
consider participating in multiple rounds of investment, to maintain their fraction of
ownership in the company, precluding dilution of ownership as new investors fund
subsequent rounds of investment.
However, angels are often faced with the dilemma: Is this company viable and just
needs a bit more cash than originally anticipated, or am I throwing “good money
after bad”? Consequently, prudent angel investors make a new decision prior to
making follow-on investments in portfolio companies, that is, considering the current
opportunity presented by the company. They ask, “Is this an investment I would make
even if I did not invest earlier?” It is for just these company needs and investment
opportunities that angel investors maintain “dry powder,” that is, a reserve of funds to
invest in existing portfolio companies beyond the funds set aside for investing in new
companies.

10

Do angels invest locally, regionally or nationally?
Entrepreneurs often encounter angel investors who are away from home and are
eager to “pitch” these angels to invest in their businesses. These entrepreneurs are
disappointed to find that most angels are not interested in making angel investments
more than 100 miles from their hometowns, even if the business plan is in the sweetspot of the angel’s interest. Why do most angels invest only locally?
Angels have typically traveled for all of their business careers, so more business travel
is not particularly appealing. Furthermore, angels are often retired businesspersons
and part-time investors, so attending Board meetings in the morning, leaving time
for other activities in the afternoon, is attractive. Overnight trips to attend Board
meetings and to engage with principals in portfolio companies are simply not as
appealing as investing in and supporting local entrepreneurs.
Finally, the motivation for some angels to invest is to help the local economy and
therefore local entrepreneurs. Appreciating this motivation helps the entrepreneur
better understand the local investing style of angels.
How are active angels compensated for the roles they serve in portfolio companies?
As was described above, the time angels invest in portfolio companies is often more
valuable than the money used to fund company startup and operations. I have
also discussed that angels are very active in some of their companies and less so in
others. In those companies in which an angel is rather passive, it is likely that other
angels who invested in the same round are active, probably because they have more
appropriate skills and experiences for this company.
Angel investors normally do not take an active management role in invested
companies; rather they serve as mentors, coaches and Directors. Angels consider
their mentoring and coaching engagements with entrepreneurs part of their
investment and, furthermore, an opportunity to keep in close contact with their
investment. Seldom are angels compensated for serving in mentoring roles. In
extraordinary circumstances, angels will step in to assist the company in a temporary
management role, and can be compensated for their efforts, but almost always in

options or warrants for additional stock in the company, not for cash.
It is common, however, to compensate members of the Board of Directors
for their role in the company, especially when the investor/Director is a very
small shareholder. (VCs and other large investors with appreciable ownership
of the company normally do not receive any form of compensation, except for
reimbursement of travel expenses.) Compensation for Directors would normally be
in options or warrants totaling no more than 1% of a startup company (vested over
3-4 years’ service) and a lower percentage of ownership for a later stage company.

11


3

Control: Who Has It?
What is control?
Control of a company is vested in the Board of Directors, who sets the policy and
direction of the company, furthermore, it is the Board’s responsibility to hire and fire
the management team, including the CEO. Many company founders are unwilling
to share the control of their companies with outsiders; and because equity investors
usually require some representation on the Board, these founders are reluctant to
seek and accept outside investors. Frankly, this is an important decision that founders
must make very early in the life of their companies. In many cases, the founder can
bootstrap the company, that is, use personal funds plus funds raised from partners,
friends and family, suppliers and customers to start and operate the company until
cash generated from operations can be used to grow the company. In fact, capital
from friends and family is the most widespread funding strategy for US startup
companies.
In many cases, however, the capital required to start the company exceeds that
which can be raised from friends and family. In other cases, the founder determines

that larger amounts of capital will increase the chance of success of the company, by
facilitating faster, earlier growth and market penetration. In each of these cases, the
founder must get comfortable with the concept of sharing control in the company.
The issue of controlling the company is an important decision for consideration by
founders as they consider starting companies.
Who controls the company?
Control of a company is, in fact, vested in the shareholders, who elect the Board
of Directors. The shareholders of the company elect the Directors and, depending
on state law and the charter and by-laws of the company, a majority of the share
ownership of the company can normally elect the majority of the Directors, hence
controlling the company. And, in most startup companies the founder/CEO (and/or
the founding team) have a majority of the ownership and hence control the Board.
So, at the early stages of the company, control is circular question, that is, the Board
controls the management team but the founders elect a majority of the Board. In a
fight over control and depending on the by-laws of the organization, the shareholder
majority generally determines the make-up of the Board and the direction of the
company.
Does control equal independence?
100% control of the ownership of the company does, indeed, guarantee
independence from interference in the management of a company. It puts the
success or failure of the company squarely on the shoulders of the founder. But,
is this level of independence really what you want as an entrepreneur? It is lonely
at the top, especially for first time entrepreneurs. If you choose to maintain 100%
ownership in your company, finding a support system of trusted advisors to help

12


make difficult decisions and establish the policy and direction of the company is
critical. Successful entrepreneurs, whether 100% owners or not, tend to surround

themselves with competent advisors with whom they can share challenges and from
whom they can solicit sage advice.
Is giving up some ownership equal to working for someone?
Bringing in outside investors results in working WITH those investors but not FOR
those investors. This is an important distinction. By investing monies in your
company, these investors are now shareholders (or partners) in the company with the
founders. All ownership must share the objectives of building a successful company
as well as sharing the objective of harvesting their investment in a reasonable period
of time (an exit from the company usually within 5 to 10 years after investment is
made).
Entrepreneurs must recognize that investors are not funding their company to help
the entrepreneur build the company as fast and as far as the entrepreneur can build
it. The investors’ objective is to quickly scale the company to a size and level of
profitability that a larger company will be interested in acquiring their company (with
or without the entrepreneur at the helm as CEO). Investors are not interested in
building a company that the entrepreneur can pass on to heirs or can operate until
the entrepreneur’s retirement. Investors are not interested in assisting in growing
a company only to have their stock purchased back by the company, so that the
entrepreneur can again own 100% of the company. The objective of investing in
startup companies is to scale the company quickly and sell the company with huge
capital gains for the entrepreneur and investors.
Savvy entrepreneurs quickly acknowledge that building a successful company is
different that “building a successful entrepreneur.” While some investors are more
patient than others, all investors seek to build a successful company in a reasonable
period of time. And, since first time entrepreneurs seldom have the skills to grow a
company to sufficient size to justify a highly valuable exit, there will likely come a time
when the founding CEO and the investors should agree to hire an experienced CEO
to grow the company towards a harvest. Many entrepreneurs resist the transition to a
“hired gun” as CEO. By insisting on remaining as CEO, they restrain the growth of the
company to the level of growth they can personally manage.

Is giving up equity like getting married?
Since it is likely that investors will remain engaged in a successful company until
exit, it is important to select investors wisely. Look for “smart money,” that is,
investors that also bring substantial business acumen and vertical experience into
your company. Such investors will understand the problems of growing a company
in your business segment and have many contacts in the industry to assist in
completing the management team, as well as finding partners and customers. While
we equate marriage to a life-long partnership, you will be working closely with
investors in building the company for as much as a decade (sometimes more). So, in
many ways, selecting investors is much like the process of getting married. Choose
carefully!

13


Do angel investors want control? How much ownership?
As we have discussed, angels are part-time investors and are at a stage of life when
they have a variety of engagements. Running your company on a day-to-day basis
is not part of their plans. They have already “been there and done that” and do not
want to go back to those 60 to 80 hour weeks managing a company. Angels will
invest in your company and step to the plate to help you grow the company as
rapidly as possible. The success you achieve will be jointly defined and executed by
you, the entrepreneur, with the support of angel investors.
Single angel rounds of investment are typically $200,000 to $1 million in exchange
for 20 to 40% ownership in the company. If the company has already demonstrated
some success in startup and growth, the first round of investment may purchase
less than 20% of the equity. Very seldom does a single angel round of investment
result in 50% ownership in the company and hence control of the Board of Directors.
Typically, the make-up of the five-Director Board after a seed angel round might be
two Directors selected by the entrepreneur, two by the investors and one agreedupon outsider.

What control will angels likely expect to exert?
As long as the company is growing according to plan, meeting milestones and not
prematurely running out of cash, the investors are likely to provide the assistance
requested by the CEO as well as complete financial and milestone oversight at
Board meetings. Angels with busy lives outside their investing activities are unlikely
to interfere in the operation of a successful company. Angels are, however, likely to
step in when the company is not meeting milestones and especially if the company is
unexpectedly running out of cash. This is what any entrepreneur should expect any
investor to do when an investment seems to be at risk.
Do venture capitalists want control?
VCs are unlikely to acquire controlling interest in a company in their first round
of investment. However, VCs (and many angels) will demand a voice in certain
decisions the entrepreneur may address, such as seeking further investment,
acquiring another company, pursuing bank debt, etc. In rapidly growing companies
which require several large rounds of investment, it is unlikely the entrepreneur will
maintain 50% ownership in the company after the second round of investment.
When the company is doing well, VCs also will provide only the agreed upon
assistance and guidance to the entrepreneur and the company. VCs, however, are
less patient than angels. VCs are full-time investors and usually have much more
money invested in each portfolio company than do angels. Consequently, VCs are
likely to step in and exert control earlier than are most angels.
Can a minority interest exert control? If so, how?
An investor’s minority interest generally has some negotiated influence (or control)
and some informal control. By reserving some rights for the preferred class of stock
in their negotiations as they make their investment, investors can require the CEO
and the Board of Directors to get the approval of their preferred class of stock before
undertaking certain specific activities, such as obtaining bank financing, making
an acquisition, selling the company, etc. So, in this case, a minority interest must
approve certain transactions of the company.

14


Investors always exert substantial influence over subsequent rounds of investment.
Prudent subsequent investors, as part of their due diligence, will poll earlier investors
for their opinions on the progress of the company and the skills of the management
team. New investors usually expect earlier investors to reinvest their pro rata share
in subsequent rounds of investment to avoid dilution of ownership of those earlier
investors. Reluctance by earlier investors to enthusiastically support the company is
always a danger signal to new money.
Early investors often have access to deeper pockets, that is, these early investors
know how to find larger investors who might be interested in investing in subsequent
rounds. This is one mechanism of control that VCs in particular use with portfolio
companies. Any unwillingness on the part of early investors to make introductions or
cooperate with new investors will always dampen the interest of new money.
Does the CEO or the Chairman control the company?
The CEO is responsible for running the company, at the pleasure of the Board of
Directors, who establishes the policy and direction of the organization. So, in theory,
the CEO does not report to the Chairman, but to the Board as a whole. In many
companies, the CEO and Chairman positions are held by the same person, making
the question of control mute. But, the duties and responsibilities of the CEO and
Chairman vary substantially from company to company.
It is my suggestion that the CEO/entrepreneur who is not the Chairman work closely
with the new Chairman to negotiate the roles and responsibilities of each position.
As will be described later, the appropriate division of duties can be of great assistance
to the CEO/entrepreneur in preparing for Board meetings and generally managing
the expectations of the Board of Directors.
Who should be Chairman of the company?
There is no consistency among early stage companies regarding who should be
Chairman. It is often the entrepreneur/CEO and sometimes the lead of the investor

group. It is best practice that the Chairman be the most qualified Director. This is
likely a Director with substantial Board experience (often an investor) who works
well with the entrepreneur/CEO. By selecting an experienced Director, the Board is
removing a substantial burden from the shoulders of the CEO. This Chairman can
work with the CEO and other Directors to establish the agenda for meetings and
make assignments for preparing reports for the Board. An administrator within the
company can be selected to collect and collate reports to be distributed with the
agenda to Directors in advance of the meeting. This Chairman also moderates Board
meetings to allocate appropriate time to the subjects of interest to the Board and
assure that proper minutes are taken at the meeting and distributed later. Selecting
such a Chairman leaves the CEO with more time to run the company without
threatening the CEO with control issues related to the meetings of the Board of
Directors.

15


What is an appropriate size and makeup of a Board of Directors?
Startup companies often have Boards of three to seven Directors. Smaller boards (35) are probably more appropriate at the earliest stages of starting a company, while
larger boards (5-7) may be better for growing companies. As was mentioned above,
an ideal five-director Board might consist of two “insiders” or Directors representing
the entrepreneur, two investors and one Director with substantial experience in
the business sector and in executing exits, agreed upon by both sides. It becomes
appropriate to increase the size of the Board when added industry expertise would
be valuable to grow the company. Maintaining an equal number of investor
representatives and entrepreneur representatives can continue until subsequent
rounds of investment are required. It is likely that the entrepreneur will then be
diluted to less than 50% ownership in the company and that the Board, at that time,
will add investors from the new group. Since it is responsibility of the Board is to
work with the CEO in building and developing the management team, it is considered

good practice for the entrepreneur/CEO to be the only employee on the Board.
Entrepreneurs can expect monthly Board meetings until the company achieves
positive cash flow, when bimonthly or quarterly Board meetings may be sufficient.
Telephonic meetings are appropriate for a portion but not a majority of meetings.
Directors getting to know one another is important to the success of the venture
and this can best be accomplished through face-to-face meetings. However,
teleconferences between regular Board meetings, especially to deal with crises, are
commonplace.
How can entrepreneur/CEOs manage investor control?
The keys to great investor relationships are communications and meeting milestones.
Not surprisingly, investors thrive on information received regularly that report on the
progress of financial and other company objectives. It is suggested that a portion
of an early Board meeting be devoted to the specific expectations of each Director
regarding communications and a group decision on progress reporting to other
investors. Once these communication expectations are defined, the entrepreneur
needs to meet those expectations. By not blindsiding investors and Directors
with bad news, the entrepreneur is much more likely to gain investor trust and
cooperation in resolving pressing issues.
What is founder vesting?
Founder vesting is used by investors to protect their interests by keeping the
founder’s “feet to the fire” in the tough times of starting and growing a company.
Let me explain why investors may need founder vesting, through an exaggerated
anecdote:
Professor Irvin has just received an investment of $500,000 in his new company from
several angel investors. The angels now own 30% of the company and Professor
Irvin owns 70% of the company. But, after a few months, the professor discovers to
his surprise that he really doesn’t like the pressures of being an entrepreneur, stops
pursuing the milestones of the company and returns to his research in the company
laboratories while on full salary. Unless this possibility has been anticipated, the
investors can do little short of legal action to stop the professor from using their

invested cash in the pursuit of his personal interests.

16


Investors use founder vesting to protect themselves from such a disaster by
temporarily reducing the founder’s ownership of the company and then giving that
ownership back over time, as the company meets the agreed upon milestones. While
it is unlikely founder vesting would be structured exactly as is shown below, here is an
illustrative example:
Time from Investment







Before investment
Immediately after investment
6 months after investment
12 months after investment
18 months after investment
24 months after investment
30 months after investment

Milestone

Ownership by Founder

---
100%
---
20%*
prototype complete
25%
delivery of first order
29.9%
burn rate down to $5K/mo 35%
cash flow breakeven
50%
revenues >$1 mil annualized 70%

Ownership by Investors
0%
30%
30%
30%
30%
30%
30%

*by one means or another, the reminder of the ownership of the founder is temporarily returned to the company

While this is a simple example and does not deal with required subsequent
investment or the implications of not meeting the stated milestones, it at least
provides the reader with an understanding of founder vesting and why it can be a
very important term to investors in startup ventures.

17

4

Fundable Companies
What is the “capital food chain” for entrepreneurs?
There are many sources of capital for startup entrepreneurs, as are outlined below:
•

•

•

•

•

•

Self: Perhaps the most important source of capital is your earnings and
savings, including second mortgages on your home and other assets.
Keep your “day job” until the startup company absolutely requires all
of your time. The more capital you can provide, the less needs to be
acquired elsewhere, allowing you to keep more equity in the company.
The least expensive source of capital is research and development
grants from government agencies. These funds can often be
expended on critical research and product development related to
commercialization of the company’s technology. This cash is neither
debt (need not be paid back) nor equity (cash in exchange for company
ownership).

A critical source of capital to startup entrepreneurs is internally
generated cash (bootstrapping), that is, cash from profits in the early
sale of products. Cash generation through profitable operations can
minimize or eliminate outside investment, maximizing the ownership
of the company by the entrepreneur. Entrepreneurs should consider
selling equity only when no other sources of capital are available.
According to a recent GEM* study, as much as $80 billion is annually
invested in startup companies in the US by informal sources of capital,
that is, friends and family. Self, friends and family provide over 80%
of the startup capital in the US and are the first place to look for
money when starting a company. It is important, however, that the
entrepreneur and the source of capital clearly understand that this
money is (a) a gift, (b) debt which must be paid back, or (c) an equity
investment in the company.
In recent years, angel investors provide about $20 billion per year to
seed and startup entrepreneurs in the US annually. This investment is
usually an equity investment or a debt instrument that the investors
can convert into an equity security later. (While I have indicated above
that angel investors normally do not invest in debt, convertible debt
can provide an option for investors to convert to equity under favorable
terms.)
VCs are also investing about $20 billion in US companies, but only a tiny
fraction of that is in seed and startup companies. VCs tend to invest at
a later stage in company development.

What role do angels play in the capital food chain?
Since angels provide seed and startup capital to entrepreneurs, they are usually the
first outside equity capital invested in the company. (Friends and family are generally

18

considered insiders to the entrepreneur.) Angels are savvy businesspersons providing
the first, independent, third-party investment in the company. Angels are excellent
early stage investors because they bring substantial business acumen with their
investment cash, a very useful asset to startup entrepreneurs.
* Global Entrepreneurship Monitor (Babson & London School of Business)
What types of companies do angels fund?
Angels make active (not passive) investments in companies that will scale.
Angels invest in retail companies, high-tech companies, life science companies,
manufacturing companies and companies in many other business segments.
Since all angel investments are in the high-risk category, angels will only invest in
companies that can provide a very high rate of return, as was discussed in Chapter 2.
Active investments are those in which the business experiences of some of
the members of the angel investing group can bring special assistance to the
entrepreneur in starting and growing the company. Angels serve as mentors,
coaches and Directors to the entrepreneur and the company. While leveraged
real estate limited partnerships can bring a very high rate of return to investors, a
limited partnership by definition is a passive investment and not considered an angel
investment.
In general, at what stage do angels seek to fund startup companies?
Prior to investing angels want to be able determine if the “dogs will eat the dog food.”
Will customers buy this product at price sufficient to enable high growth by the
startup? Consequently, angels will not usually look at a company until the product
development is sufficiently advanced to the point that the product or a prototype of
the product has been shown to customers. The angels will then want to talk to those
customers to determine if they will buy the product and at what price points.
Investors will generally not invest in technologies, that is, companies formed around
interesting technology but for which products have not yet been identified. Angels
are also unlike to pay for the writing of software code, meaning that the initial

product release has to be sufficiently complete so that customers can begin to
appraise the value of the product before angels will fund the company.
It is not uncommon for startups with exciting technology to develop a licensing
business model - commercializing their technology through licenses to larger
established firms. While a viable commercialization model, it is not a particularly
interesting business model for investors. Generally, licensing companies grow slowly,
dependent upon a royalty stream from revenue growth by licensees. And, selling a
licensing company to exit can be a struggle when most possible acquirers are already
licensees of the company.
There are many exceptions to these guidelines, such as angels investing in drug
development or angels investing in exciting innovative technology. But, in many of
these cases, a serial successful entrepreneur is involved, or a world-class laboratory
is commercializing next generation technology, or a well-known scientist is staking
his reputation on the science behind the venture. With these as exceptions, angels

19


are normally looking for deals where customers have been identified and are also
available to discuss the product with the investors.
What is a fundable CEO?
Angels love investing in serial entrepreneurs, who have had several successful
startups on their resume, including a company which they “took public” [an initial
public offering (IPO), a time consuming and expensive process of converting private
securities into publicly tradable shares] as well as at least one company failure in their
backgrounds - one usually learns more from a failure than a success. But, frankly,
these investing opportunities are very rare.
Angels seek to invest in entrepreneurs who are highly-motivated, experienced
businesspersons who are capable of making impressive presentations to investors,
partners and customers. Integrity is critical – angels do background checks on

entrepreneurs before investing. “Highly-motivated” implies a passion for success and
“both feet in.” Angels are not interested in funding entrepreneurs who “can always go
back to their day jobs” if the going gets tough. Investors seek entrepreneurs with lots
of business experience, especially in the business segment of the startup company.
Sounds good…but you don’t score high on this list of qualifications. What should you
do?
1.
2.

3.

4.

Be absolutely truthful in your dealing with investors.
Surround yourself with a first-class team, experienced
businesspersons who do have the business acumen you lack. If you
don’t yet have the cash to put them on the payroll, have them waiting
in the wings.
Surround yourself with a first-class team of business advisors…I mean
top drawer! If you do a great job of recruiting them, they will agree
to serve as advisors for a small piece of the equity (no more than 1%)
in your company.
Finally, be prepared to step aside after the company has achieved
a few milestones and help the investors hire a top-notch CEO
for the company. Continue to support the company in a role
consummate with your background. Investors expect a substantial
return on investment in a reasonable period of time. It is in no one’s
best interest (including the entrepreneur’s) that the growth of the
company be limited by the skills and experiences of a first-time CEO.

First-time entrepreneurs often trip over their egos. It is almost always in the
entrepreneur’s best interest to congenially step aside and assist in hiring and ramping
up a new CEO. By doing so and staying involved with the company, the entrepreneur
optimizes his or her return on investment. After exiting, the entrepreneur can start
another company…this time as a serial entrepreneur!
What are angels looking for in a CEO?
In interviewing entrepreneurs, investors are looking for many personal qualifications.

20


In fact, the investor will likely want to interview your management team and talk with
your earlier investors (even friends and family) as part of the process. At the risk of
repetition, here is a summary of the characteristics of fundable entrepreneurs:
Integrity – Truthfulness and honesty are a must. Angels will check into an
entrepreneur’s background. Be truthful from the start.
Interpersonal relationships – Are you a skilled manager? Do your customer,
partners, earlier investors and family appreciate your personality? Do you carry
yourself well in public (speaking, manners, etc.)?
Coachable – Do you listen? Do you seek the advice and counsel of others? Or, are
you a “know it all”?
Passionate and committed – Is this just another activity for you, or is starting this
business a self-consuming passion for you? Do you have “both feet in,” that is, totally
committed to the startup venture?
What is a fundable management team?
A critical component of the management team is the entrepreneur’s willingness
to surround him or herself with the most qualified management team available.
Typically, “A” entrepreneurs hire “A+” managers, while “B” entrepreneurs hire “C” and
“D” managers. Always be willing to hire executives who are smarter and have more
experience that you do! Having prior experience with some of the members of your

management team is a plus, but is not critical to success. (It is always nice to know
that you work well with the rest of the team prior to starting a company.) Don’t hire
clones of yourself (same degree from the same school with the same experience
since graduation). Develop an experienced, well-balanced team.
Must my management team be in place to seek funding?
Demonstrating the skills to attract highly qualified talent and your willingness to
surround yourself with smart businesspersons is absolutely necessary. But, the entire
team need not be in place at the time of funding. It is OK to have a few waiting in
the wings for the company to be funded and even to tell the investors you need
their help in filling a key position or two. It is a benefit to have a team member or
two on board (or prepared to join the company). It is critical to make it clear to your
investors that you intend to hire the most qualified team available and you would like
to involve them in the process of building out the team.
What should an entrepreneur do when the company is not yet fundable?
There are several reasons why a good pre-seed company might not yet be fundable,
but may be an excellent candidate for funding at a later date. One likely reason is
that the entrepreneur has not yet addressed the critical issues necessary to complete
a business plan. Examples: The intellectual property (IP) may not yet be under the
control of the company. Or, the marketing channels have not yet been flushed
out. Or, the proforma financials are not yet validated. An entrepreneur must have
carefully thought through the business plan and be very well versed in the plan prior
to approaching investors.

21


The product may not be defined sufficiently to interest investors. Remember, angels
want to determine if the “dog will eat the dog food.” If product development is
insufficient to yet capture customer interest, more work needs to be done prior to
approaching angels.

So what is an entrepreneur to do until the company is fundable? Remain patient,
keep your “day job,” seek grants and funding from friends and family to continue
writing the business plan or complete product development. Stay the course…don’t
waste your time pursuing funding from angels or VCs until the company is fundable.
Your time is much better spent working on the plan and the product.
Where else should I look for funding until angels will fund my company?
As have been mentioned, personal earnings and savings, grants, and friends and
family are the principal sources of pre-seed capital. If necessary, entrepreneurs can
also seek capital from wealthy local experts who understand the opportunity and
may be particularly interested in the product or market. Solo angel investors often
get involved with pre-seed companies long before groups of angels might actually
fund a startup company. Many enjoy the startup process and will introduce the
entrepreneur to groups of angels later, when the company is ready. But, be careful.
Normally, these wealthy experts and solo angels will do so only when they have a
deep understanding of this marketplace. They have likely invested in a similar fashion
in other companies. They must be “right-minded” persons, truly interested in helping
entrepreneurs start companies in specialized verticals. Check their references! Talk
to other entrepreneurs whom they have helped start their companies. Be sure these
are investors of integrity, for whom helping you is their primary motivation. And, if
necessary, share some equity with them for their effort. They should invest some
cash and a lot of time in assisting you in teeing up your company for investors. And,
for that, you might consider sharing 3 to 10% of the company (common stock) with
them, depending on their level of effort and expertise.
What if my idea is “perishable”?
“Perishable” opportunities are those which have no value unless commercialized in
a limited window of time. Some experts in the new venture marketplace feel that
the “first mover advantage,” that is, the first company with a new product for a new
application, has a large advantage over companies who enter the market later. Many
of the rest of us feel that “first mover” advantage is over-rated, having seen the “first
mover” make many mistakes and spend too much money making a market for which

the second or third company in the space successfully dominates.
But, some ideas are truly perishable…software that is compatible with a totally new
release of a dominant player’s software upgrade may indeed have a limited shelf
life before many competitors enter the market (or the “big guy” introduces the next
version). There are many such opportunities.
My suggestions for those with “perishable” ideas are (1) make sure the idea is both
scaleable and fundable; (2) hurry, with patience; and (3) consider shortcuts to the
marketplace, such as development and/or marketing partners. It is always better to
share a perishable idea and take a smaller piece of the pie than to see the window of
opportunity disappear.

22


Will angels sign Non-disclosure Agreements (NDAs)?
It is quite shocking and disconcerting to first-time entrepreneurs to learn that neither
angels nor VCs will sign a confidentiality agreement (or a non-disclosure agreement)
to read the entrepreneur’s precious business plan. This is a serous dilemma.
Entrepreneurs have truly confidential information but investors cannot possibly sign
several thousand NDAs in their investing lifetime. So, what is an entrepreneur to do?
Trust – Work only with investors whose integrity you can validate. This is actually
easier to confirm than you might expect. Most investors value their good names and
integrity far too much to ever intentionally steal an idea. There are simply too many
good ideas and too many good business plans available to invest in to spend time
attempting to steal ideas. Always do “due diligence” on your investors. Make sure
they are really persons you would like to partner with in your company.
Non-confidential business plan – As an innovative entrepreneur with a “top secret”
venture idea, you must learn to write a non-confidential business plan. Define the
“secret sauce” and find a way to write the plan without revealing the confidential
materials. And remember, with access made possible by the Internet, there are

no secret customer lists and no new business models. Confidential technology is
usually covered by patents, and a clever entrepreneur can write the plan around the
confidentiality.
Investors do sign NDAs! – If you write a solid plan for a scaleable product without
revealing the “secret sauce” and an investor finds your plan compelling, he may
indeed sign a NDA during the “due diligence” prior to investing (but not prior to
getting to know you and the plan). In this case, the investors or a designate may
agree to sign a very narrow non-disclosure agreement in order to read and validate
the critical 1000 lines of software code or the critical claims of a new process patent
or the chemical formula for your newly discovered “secret sauce.”
The trick is to write a great non-confidential business plan and then let the investors
ask you to reveal the confidential information to them. At that point they will be
willing to sign a limited NDA.
Who owns my Intellectual Property (IP)?
Entrepreneurs cannot license their technology to their company and keep ownership
of the intellectual property for themselves. Investors will simply not invest in
such companies. If you are an entrepreneur/inventor and you own rights to the
intellectual property to be utilized by the company, the technology you own related
to that venture must be included in your contribution to the company at startup or at
least before investors will engage.
How can I protect my IP from investors?
Under the limitations I have described above, you may need to protect your truly
confidential information from potential investors; however, you do not need to
protect confidential information from your investors. After all, they are your partners.
They succeed when you and the company succeed. As long as you have done

23


reasonable background checks on your investors and validated their integrity, you

have done all you can to protect yourself.
You will also be surprised to find that very few investors will care about the IP
after the investment, except that the company owns it. Investors will primarily
be interested in the quality of the company the entrepreneur is building to
commercialize the technology, rather than in the technology itself. The exceptions
are when ownership of the technology becomes an issue (legal challenges or
infringement) or if the company has difficulty commercializing products utilizing the
technology.
Who can assist me in managing my IP?
If the patent estate is critical to the success of the venture, it is incumbent upon the
entrepreneur to secure the best possible team to assist in developing a technology
strategy for the company. What technology should be patented? What technology
should be protected as trade secrets? What technology should be acquired from
others (such as a university or national laboratory) under what payment terms?
Management of IP is expensive and most entrepreneurs have little money, so careful
planning is necessary to optimize expenditures in designing a highly fundable
company.
There is no rule of thumb for managing IP. Get some business advice from your
local entrepreneurship center or from advisors on the best available legal counsel in
your particular technology arena. Sometimes you can get excellent counsel to write
fundamental patents at a reduced rate or payable over time until the company is
funded, with a promise to use the same counsel for future work.
Patent attorneys are not necessarily the best sources of information on establishing
a strategy for your patent estate. If you can find business experts familiar with
the technology or market of interest, who are willing to advise the company (for
cash or better yet, for a small piece of equity), engage them to develop a strategy
and to negotiate licensing arrangements with university and laboratory sources
of technology, if appropriate. In any case, it is suggested that you engage with an
experienced business advisor as you negotiate technology rights with universities and
laboratories.

24


5

Planning Growth and a Funding
Strategy
Building a Scaleable Company
In Chapter 2, we described scaleable companies. These companies propose rapid
growth and generally feature products for large niche markets. Entrepreneurs of
scaleable companies propose sustainable models for their startup companies that
can reasonably be expected to provide a substantial return on investment in five to
seven years.
Do VCs look for larger opportunities than angels?
Angels tend to invest $200,000 to $1 million per round in seed/startup and early
stage companies, many of which will require multiple investments to achieve
positive cash flow through operations. Some angels fund rounds of investment sized
between $1-2 million, however these deals are infrequent, probably less than 5%
of angel deals. The average round of investment by angel investors in the past two
decades has not changed substantially and remains at $250,000 to $400,000. A few
companies have raised $5 million or more from angel investors (in multiple rounds of
investment) but these are the exception, not the rule. Most companies raise less than
a total of $2 million in angel capital. For these companies, an exit valuation of $10-20
million can be an exciting and profitable opportunity!
Venture capitalists, on the other hand, have raised huge amounts of capital in the
past two decades from their limited partner investors. Consequently, each VC must
invest more money per deal than in the past. In the early ‘90s, the average round
of investment by VCs was $3 million or so, but as VCs raise much more money
from their limited partners, the average VC round has steadily increased to $7-8

million, more than double the average investment round before the Internet bubble.
As a general rule, later stage investments tend be much larger than earlier stage
investments. Since VCs now invest larger amounts of money per deal, VCs are much
more likely to invest in later stage deals than in the early ‘90s. VCs often invest $25
million or more in total (multiple rounds) in portfolio companies, and look to exit
those ventures at valuations of $100 million or more.
If you think about it, the startup phase of a high-growth company will require
relatively small amounts of funding, probably no more than $1 million. But, highgrowth startup companies need to raise significant amounts of capital to sustain very
high growth over several years. The management teams of these highly scalable
companies will soon face a dilemma; how to raise the capital necessary for sustained
growth? One option is to raise more money (probably from VCs) to sustain the
maximum growth rate. The second is to grow more slowly and organically, that
is, using cash generated by the business and later bank debt for growth. This is a
complex decision and there is no standard answer to this quandary. It depends on
the nature of the business and the appetites of the founders and early investors.

25